Where will new banks come from?

Undermining digital finance because of supervisory inadequacy does us no favour

Yet, the existing incumbents own the space, with no greater comfort to the consumers.
Yet, the existing incumbents own the space, with no greater comfort to the consumers.

By Srinath Sridharan

As India celebrates 75 years of Independence, it might be useful to think of leveraging its banking sector to shape inclusive, stable economic growth for India@100. Finance is one of the oldest businesses in human history, and is one of the most-regulated industries. The country’s financial sector has been slow in adopting digital innovations that have come about in the past few years, one of the reasons being the regulatory moat that the incumbents enjoy. More is written and spoken about financial inclusion than the actual impact on-ground. Call it organisational inertia if you wish. Digital innovations for better access to finance have done more good for inclusion. The older catchphrases of ‘distribution strength’ and ‘product availability’ are passé. Consumers seek ‘phygital access’, ‘banking, anytime, anywhere’ and more importantly, ‘financial solutioning’. Yet, the existing incumbents own the space, with no greater comfort to the consumers.

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India and banking
The size of the assets/liabilities of the Indian banking industry is over Rs200 trillion. As of December 2021, the total outstanding bank credit stood at Rs 116.8 trillion. To achieve higher credit growth, the sector needs not just more banks, but also newer banks, all with healthier balance sheets and long-term capital availability and the business intent to provide credit offerings. For this, business is all about pricing the risks.

For the GDP to grow, we need robust credit growth. Time and again, many experts have argued in favour of licensing more banks with specialisations to serve different consumer categories, to make banking more-inclusive and profitable. Yet, not many specialised or universal banks have been licensed to enter the business for various reasons, the primary being that those who can give comfort to the regulator are few and far between.

Since the past few decades, there have been various types of banking needs felt by the regulator, and hence, associated licence categories have been created. Today, the formal banking sector includes over 2,800 licensed entities, most of them being sub-scale sized. This has only generated new issues for the regulator—of poor governance, capital constraints, weak management, unaddressed consumer grievances. In contemporary India, with proven digital acceptance by consumers to a large extent, it is useful to assess if these licence categories create any consumer-impact or are even needed in the first place.

The future is already here
Just a decade ago, it would have seemed Utopian to dream of digital-only banking and chatbot-based interaction with banks. Digital payment systems have evolved a lot in a short time. This is only the beginning of the digital finance era. Undermining its potential for current supervisory inadequacies or policy concerns won’t account for a responsible future of financial markets path.

With digital finance, the regulator will have to strike a balance to allow innovation and yet have all safeguards, including consumer protection, systemic risks, privacy issues, data sanctity, etc. This is only the start of the digital era. With evolving technologies, more such developments will test the concept of regulatory proactiveness, as well as who defines what is right for the society. It is time that we connect disruptions, digital and demographic to the raison d’etre of regulation. There lies another challenge—getting comfortable with younger, first-generation promoters and private investor-owners of potential banking entities. This is where the digital and non-digital-natives have to find common ground.

Don’t like (m)any
RBI’s experience with licensing private sector banks during the past few decades indicates that it has had to step in on multiple occasions to bail out various banks and other licensed entities. But should that deter it from opening up the sector further? Isn’t ‘regulating’ the role of a financial regulator?

While it does have its PCA framework for working on ‘you are being watched’ financial entities, it has also not commented yet on the business viability and suitability of newer banking categories like payments banks or SFBs.

The RBI approach to big NBFCs is either operate with tougher, bank-like rules or convert to become banks after rejigging the ownership structure. Yet, converting them into banks might not be as smooth as one expects.

RBI, like any other regulator, likes each of the entities it regulates to be stable, profitable and to grow steadily. The new-age challenger entities—the fintechs—who have brought in much innovation as well as private capital to bolster the business funding are aggressive about using valuations as a metric.

Regulatory systems and capacity-building around digital finance will take time. The supervisory aspect will be of particular concern. The regulatory role is to ensure consumer protection. If a regulator reacts, either it is showcasing systemic risk to worry them, becoming a communication nuisance that consumers would complain loud enough about, or is being politically sensitive. But these worries and discomfort about newer industry innovations and players cannot, and ideally, should not stop the process of creating newer banking categories and identification of newer banking entities.

Banking promoters need deep pockets, and patient capital at that. Importantly, regulators globally have worries about the ultimate ownership of banks being clear and clean, and preferably resident in their jurisdiction. The ‘fit and proper’ criteria, promoter background and reputation, and availability of long-term capital are the asks.

In a nation of 1.4 billion people, why are we struggling to find a few more wealthy, good-intentioned individuals interested in becoming bank promoters, especially those that aren’t corporate house promoters or industrialists? The private equity players don’t have the luxury of time to lock in their stakes for many years that the regulators would get solace from. Then, can the regulator steer and not inadvertently influence any banking moat by preventing bringing in newer players? Can the regulator allow for efficient competition in the sector by bringing newer players and allowing for weaker ones to merge with stronger ones? Can it move out of its comfort zone, given its dislike for certain categories of owners as past precedence shows? Must we lag behind on credit growth for the overall inclusive socio-economic development?

Now, the larger question is that where are the new banks? And by when will they come?

The author is Corporate advisor and independent markets commentator  |  Twitter: @ssmumbai 

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